Rhode Island Court Resolves Palazzolo

Palazzolo v. State, 2005 WL 1645974 (R.I. Super. July 5, 2005).

Jonathan Lew, 2L, Roger Williams University School of Law

The landmark U.S. Supreme Court decision of Palazzolo v. Rhode Island, decided in 2001, recently made its way back through the Rhode Island court system to determine whether the denial of a development permit to coastal landowner Palazzolo amounted to a taking. While the U.S. Supreme Court found that Palazzolo’s claim was ripe for appeal, it left open the question of whether he could recover for a state denial of his proposed large-scale condominium complex on coastal wetlands. The Rhode Island Superior Court determined Palazzolo did not show a taking of private property without just compensation.

The Palazzolo Property & Claim
Palazzolo, president of Shore Gardens Inc. (SGI), acquired Rhode Island coastal property in 1959. Six prime lots on which houses could be easily built were immediately conveyed to other owners; the remainder of the property, a salt marsh located on the south side of Winnapaug Pond, was located on such permeable ground that any attempt to build would first require considerable fill.

In 1971, Rhode Island created the Rhode Island Coastal Resources Management Council (CRMC) to protect the State’s coastal properties and the Council subsequently enacted the Rhode Island Coastal Resources Management Program (CRMP), which designated salt marshes as protected coastal wetlands on which development is greatly limited. In 1978, SGI’s corporate charter was revoked and Palazzolo became the sole landowner. He filed proposals to fill the marsh in order to build condominium complexes, all of which were denied because they conflicted with the CRMP and did not satisfy the standards for obtaining a special exception.

Palazzolo filed an inverse condemnation action asserting that the denial of his permit applications amounted to a taking of his property without compensation in violation of the Fifth and Fourteenth Amendments. The initial trial was held in 1997 and the Rhode Island Superior Court entered a judgment for the State. The Superior Court found that no taking had occurred because the state regulations precluding the development predated Palazzolo’s ownership of the parcel. The Superior Court also found that the development contemplated by Palazzolo would constitute a public nuisance and bar him from compensation. On appeal, the Rhode Island Supreme Court affirmed the Superior Court’s decision by finding that the appeal was not ripe for decision because while the CRMC denied Palazzolo’s application, it never made a final decision as to what land, if any, could be developed.

In 2001, the U.S. Supreme Court reversed this decision finding that Palazzolo’s acquisition of title after the regulations took effect is not an automatic bar to a takings claim, explaining that “[f]uture generations, too, have a right to challenge unreasonable limitations on the use and value of land.”1 Moreover, the Court found the case was ripe for decision because it would be futile to force Palazzolo to continue to submit additional plans when the initial proposal was rejected and the State effectively determined which portion of the land in question could be developed. Consequently, the Supreme Court remanded the case back to Rhode Island to conduct a takings analysis, known as the Penn Central test, on the facts of the case.2

Nuisance
Before conducting the Penn Central analysis, the Rhode Island Superior Court revisited its original conclusion that Palazzolo’s proposed development would constitute a public nuisance, precluding a verdict on his takings claim. The Supreme Court has found that there can be no taking in a case where a proposed use is prohibited by nuisance law.3 The state used the theory of anticipatory nuisance because a “court may enjoin a threatened or anticipated nuisance, public or private, where it clearly appears that a nuisance will necessarily result from the contemplated act or things which it is sought to enjoin.”4 The state argued that Palazzolo’s proposed development, a large scale condominium complex, constituted a nuisance because it would adversely affect the environment by increasing nitrogen levels and reducing marshland, which filters runoff. The court agreed, also holding that the marshland has a unique character and such a large complex would obstruct views and jeopardize the pristine nature of the location.

Penn Central Test
The Penn Central test guides a court in determining whether a taking has occurred by measuring the impact regulations have on property. The three factors that set the framework for the test are (1) the character of governmental action, (2) the economic impact of the action on the claimant, and (3) the extent to which the action interfered with the claimant’s reasonable investment-backed expectations.

Regarding the character of the state’s action, Palazzolo has claimed a partial regulatory taking because the state regulation has banned certain uses of his property. Palazzolo argued for compensation because the cost for preserving wetlands should be borne by taxpayers and not by him as an individual property owner. The Superior Court found this argument to be unpersuasive because the same regulation affects the surrounding landowners and it is impractical for the government to compensate each and every landowner for their inability to develop large-scale complexes on unsuitable land.

Regarding the second prong of the Penn Central test, Palazzolo based his economic impact upon two theories. First, Palazzolo claimed the State denied him his entire planned development and he should be compensated based on a fifty-lot subdivision. The second theory is based on whether or not half of Palazzolo’s property is subject to the Public Trust Doctrine. If the Superior Court found that half of his property lies below the mean high water line, that portion of Palazzolo’s property would be subject to the Public Trust Doctrine and held by Rhode Island in trust. Palazzolo concedes that if the Superior Court finds half of his land to be subject to the Public Trust Doctrine than he should only be compensated for a 17-lot subdivision.

The difficulty in determining Palazzolo’s economic impact rested on the reliability of trial experts and real estate appraisers. Palazzolo’s engineer estimated that it would cost over $460,000 to provide the infrastructure and site work for the 17-home development and over $1 million to accommodate the 50-home development, while the State’s expert estimated that the development costs of the 50-lot subdivision would be almost $3.9 million and the development costs of the 17-lot subdivision would be $1.3 million. Ultimately, the Superior Court found the State’s expert more reliable because the “fatal flaw in the plaintiff’s profit estimate is principally due to the site preparation costs determined by Plaintiff’s engineer.”5 Among other factors, Palazzolo’s engineer lacked experience with marshland development and failed to use the most accurate pricing information, which led to figures that were “unreasonably low and unreliable.”6 The court ultimately found that “regardless of any diminution of parcel size available for development due to the Public Trust Doctrine, site development costs unique to the parcel in question would result in an economic loss.”7 The court also relied upon “average reciprocity of advantage” stating that Palazzolo and the surrounding marshland owners are receiving a benefit from the undeveloped marshland if it remains pristine in nature.

Regarding the final prong, the Superior Court found that Palazzolo’s “investment backed expectations were not realistically achievable.”8 It refused to recognize Palazzolo’s development proposals as reasonable because any expectations would have been modest at best. Palazzolo paid a modest sum to invest in this subdivision with his partner, Urso, an attorney with prior real estate experience. After the six prime lots were sold, Urso, who understood the difficulties of developing the marshland and wanting to avoid a bad investment, sold out to Palazzolo. In addition, none of the surrounding marshland owners had developed any significant portion of the marshland, especially for a development the size of Palazzolo’s proposed development, and Palazzolo was aware that such a significant development would have to be approved by the State. For these reasons, the Superior Court found that Palazzolo had no reasonable expectation that he would be able to develop the property as he proposed.

Conclusion
The Superior Court’s determination that Palazzolo’s development plans would be a nuisance was sufficient to bar his takings claim. However, the Superior Court also analyzed Palazzolo’s claim under the Penn Central analysis finding that the denial of Palazzolo’s large scale development plans was not a taking when part of the property was still available for single family development. This Superior Court decision concludes Palazzolo’s attempt to be compensated for his undeveloped marshland.

Endnotes
1. Palazzolo v. Rhode Island, 533 U.S. 606 (2001).
2. The Penn Central test comes from the landmark Supreme Court decision Penn Central Transportation Co. v. New York City, 438 U.S. 124 (1978). In this case the Supreme Court held that plaintiffs could not establish a taking simply by showing that they had been denied the ability to exploit a property interest that they had believed was available for development. The Court established a three-part test that serves as the principal guideline for resolving regulatory takings claims.
3. Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992).
4. Seidner, Inc. v. Ralston Purina Co., 24 A.2d 902 (R.I. 1942).
5. Palazzolo v. State, 2005 WL 1645974, at *10 (R.I. Super. July 5, 2005).
6. Id.
7. Id. at *11.
8. Id. at *12.